Posts Tagged ‘Demand management’

What would you expect to be the most popular post on this blog? Something on lean operations? One of those posts on managing queues? Nope. The most popular post by a wide margin (more than 13,000 page views than the next most popular post) is something Gad wrote in 2011 on how airline ticket prices vary by day of week. The conclusion of that analysis was that Tuesdays are the best day to buy. The story behind this rests on how airlines manage their pricing. While airline revenue management systems are largely automated closing out fare classes on flights as fill up, they do require some human intervention. That intervention tends to happen early in the week as managers evaluate how well leisure fares sold over the weekend.

A new deep dive into airline fares suggests Sunday is the best day to find low fares. This is a departure from the conventional wisdom of recent years, when Tuesday was considered the best bet.

Airlines Reporting Corp., which processes tickets for travel agencies and handles about half of all tickets sold, tallied up ticket sales. Over a 19-month period ending in July, 130 million domestic and international round-trip tickets worth $94 billion showed the lowest average price, of $432, was on Sunday. At $439, Saturday’s average is also lower than Tuesday, which averages $497.

If you live here in the States, you may never have heard of the telecommunications company EE. But they are a major player in the United Kingdom with brands like Orange and T-Mobile. According to their Wikipedia page, they have around 28 million customers. EE has a new service offering that I must admit is kind of intriguing. Here is how it is described on their web page.

Priority answer service

From 6 August 2014 we’re also introducing a priority answer service. It’s available to all customers on pay monthly and SIM only plans.

Our priority answer service gives you the choice to get support even faster for just 50p per call when you call 150 and want to speak to customer services. It’s always available so if there’s a queue, you can be moved towards the front – ideal if you’re in a hurry.

How much it costs

The charge for this is 50p. If you’re on a plan that includes standard charging for customer services at 25p, you’ll only be charged an extra 25p for priority answer – so the total for the call with priority is 50p.

The 50p charge applies regardless of how long the call lasts.

To save the Americans the trouble of Googling this, 50p works out to about 84¢. So what do you think happens when customers are given the chance to jump the queue for less than a buck?

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Why do you stand in line? In many Western countries, that is a silly question. You stand in line because that is what you do. Whether waiting to check out at the supermarket or get into a ballgame, standing in line is the norm. You stand in line because everyone else is standing in line. However, as a National Post article points out, standing in line is very much a cultural phenomenon and not just some inherent human trait (Everyone line up: Canada’s tradition of orderly queuing ‘foreign and strange’ to many newcomers, Jul 25).

“Lining up is seen as a universal sort of truth,” said J.J. McCullough, the Vancouver-based author of J.J.’s Complete Guide to Canada, an online primer for newcomers. “And if someone doesn’t adhere to the protocol then it must be because they’re uncouth or uncivilized, rather that this is a sort of idiosyncratic tradition that we’ve internalized.” …

At the Canadian School of Protocol and Etiquette, located in London, Ont., lineup training comes on the same day students are taught about North American-style introductions. Students are taught where to line up, how to maintain one’s proper place in the lineup and — most importantly — how close to stand.

“In certain cultures, queue etiquette is just not on the radar,” said school director Wendy Mencel.

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Restaurant reservations are back in the news. The Wall Street Journal had a story discussing two aspects of reservations — restaurants that offer tickets and sites that sell other people’s reservations (Ticket to Dine: The Restaurant Reservation Revolution, May 30). The first of these is an interesting trend if only because it so drastically changes the nature of running a fine dining establishment. Even with reservations, the number of people a restaurant serves in a night is random since they cannot guarantee that everyone will show up. Turns out, making people pay upfront does wonders for attendance.

“I’d been thinking about tickets for years,” said Nick Kokonas, a former derivatives trader who pioneered the approach, in 2011, at his Chicago restaurant Next—one of three ticketed spots he runs in the city with chef-partner Grant Achatz. At his tasting menu restaurants the ticket price covers the full cost of a meal—tax and tip included—with beverage pairing available as an optional add-on. But Mr. Kokonas has also begun experimenting with tickets in an à la carte setting, pre-charging $20 per seat at his cocktail bar the Aviary—a down-payment on the food and drink you’ll be consuming that night. “Our no-shows at the bar dropped from 14% to near zero,” he said. “If people buy tickets to a show, they go see the show.”

Imagine that you are a service provider and you have two ways of reaching customers. One way has you selling directly to customer while the other goes through a middleman and requires paying a commission. If you have a limited capacity, how much should you allocate to one channel over the other? What if you have to sell though the channel requiring a commission first so you cannot easily reallocate capacity between the channels?

That is the challenge facing many restaurants who offer reservations through OpenTable. Many restauranteurs game the system and may be less than honest on OpenTable about available capacity. Here is how MainStreet explains the issue (How to Tell if the Restaurant Is Lying to You, Feb 10).

Longtime OpenTable user Marcy Schackne offers testimonial validation. She checked OpenTable to book at the Palm steakhouse in Bal Harbour, Fla; it showed up full, but when she called and asked for a table, she was promptly given a reservation.

Precisely the same happens at hundreds of restaurants every night.

What gives? Dennis Lombardi, executive vice president for food services strategies at retail consulting firm WD, said that for many restaurants, the $1 per diner they pay OpenTable for a booking – on top of a fixed monthly fee – “rankles.”

They think they can book diners more cheaply themselves,” he said.

Adi Bittan, CEO of feedback service OwnerListens, with many restaurant clients, added: “For times when they expect to be full based on past experience, they do not want or need to take the OpenTable reservation. They’re taking a gamble, because they could end up with empty tables — and then the diner will walk by and see it — but it’s a calculated gamble based on probability. Since most of us, restaurant managers included, are not economists or mathematicians, we understand this dynamic intuitively but will often get those exact probabilities wrong.”

Meaning the restaurant bets that it doesn’t need OpenTable, but the empty chairs it winds up with make a mockery of their inductive capabilities.

I’m not really an economist nor a mathematician, but I have thought about this problem. (more…)

One of the most basic tools in yield management is overbooking. For any service provider, capacity is perishable. Having an airline seat, restaurant table, or doctor sit idle is expensive so if you cannot be certain that every scheduled passenger, diner, or patient is going to show up, overbooking reduces the chance that capacity goes unused. Indeed, we have had a number of posts on overbooking over the years.

Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013, the latest period for which data are available. Virgin America, with a bump rating close to JetBlue’s, oversells only on certain flights and usually limits the number of seats directly to the number of no-shows it expects in coach, spokeswoman Jennifer Thomas said in an e-mail. On the other end of the spectrum, Southwest subsidiary AirTran Airways had the highest rate among U.S. non-regional airlines required to report oversales, with 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).

Several analysts expressed puzzlement over why JetBlue has avoided a common industry practice that can tip a particular flight’s financial performance from loss to profit. The airline also doesn’t advertise its practice, so most people are unaware that it doesn’t overbook—including at least one Wall Street analyst who covers the company. “It’s a bit of a head-scratcher,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. “It’s all about the extra few hundred dollars that can turn a flight profitable, especially when it’s relatively free money.”

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Restaurant reservations remain an endless source of fascination for me so I was struck by a recent article on Slate suggesting that restaurants sell reservations (Restaurants Should Sell Reservations, Dec 28). Here’s the pitch:

Walking past a bunch of people standing in line to wait for brunch tables just now, I’m reminded that there seems to be a compelling logic behind the idea that restaurants ought to sell reservations separately from food or drink. The price of a steak is determined by the food cost and the food cost ratio that a restaurant needs to make its economics work. But as there’s clearly higher demand for a table Saturday at 7 p.m. than Tuesday at 5 p.m., making the Saturday reservation should cost you extra.

The author notes that Alinea here in Chicago sells reservations (which we have covered before with its sister restaurant Next) and argues that while Alinea is very high-end that a similar logic should hold at less lofty places.

But for a more ordinary restaurant—good food, good service, good decor, but nothing to make a huge fuss over—timing is really important. A table outside on a nice day at the prime brunch hour is a delight, over and above the value proposition of the food. Putting the table and the time itself up for sale over and above the price of the food would be a smart move.